It Has to Get Uglier Before It Can Get Better

By David Stockman  |  July 6, 2018

the way to create art is to burn and destroy/ordinary concepts and to substitute them/with new truths that run down from the top of the head/and out from the heart

– Charles Bukowski, Sifting Through the Madness (2004)


The Donald inherited a god-awful mess.

And, since taking office, he hasn’t faltered on his Great Disruptor mission in the slightest.

Actually, he’s bringing on the next crisis – one that might see the end not just of Bubble Finance but the Deep State, too – with all deliberate speed.

At the same time, the Donald is painfully unaware of his part in this quadruple-whammy.

That includes inciting a global trade war, signing off on soaring federal deficits, and whiffing on fixing the Federal Reserve.

Of immediate concern, however, is the length of the current economic expansion and the rate of job growth during this one compared to others.

We’re 109 months into what’s already the second-longest uninterrupted growth phase in history. If things hold, we’ll be celebrating a new all-time record less than a year from now.

So it’s old.

And it’s weak.

During the 1980s, the government’s official job count grew by 2.05% per year on a peak-to-peak basis. It grew by 1.75% during the 1990s, when we saw that all-time-record 119-month expansion.

By contrast, that count has grown by just 0.69% during the current expansion. And the job mix and quality is far inferior in this “gig” economy.

Where is the accelerator that will keep mild second-quarter spurts in consumer spending, inventory building, and exports going during the quarters beyond?

The vaunted Trumpite/GOP tax cut amounts to only 0.8% of personal disposable income.

It turns out that surging gas prices and the towering indebtedness are proving more than enough to offset any short spree-run, even one financed by Uncle Sam’s credit card.

And capital spending by businesses is still well below the pre-crisis peak.

It’s been that way for years.

That’s despite the fact that there have been absolutely no after-tax barriers to new, major investment in assets and people in recent years.

The Fed and other central banks have made the cost of capital cheaper than at any other time in modern history.

During Fed-driven, “bubble” cycles, unsustainable imbalances and speculative excess build up throughout the financial system.

They metastasize – like cancer – with time.

In other words, the longer the bubble cycle is, the greater the collapse will be.

More CEOs will “restructure” more Main Street jobs out of existence.

You might say crashing stock options values are the proximate cause of modern recessions.

Ultra-low yields and ultra-high price-to-equity ratios are good for Wall Street and Corporate America.

That combination hasn’t been so good for Main Street.

Meanwhile, the Donald hasn’t jump-started Obama’s moribund economy. Indeed, the cycle is running out of gas.

And that’s to say nothing of fierce headwinds quickly gathering.

That “yield shock” we’ve been warning of?

We – the United States of America – are gonna have to borrow about $1.2 trillion in fiscal 2019.

That starts on October 1, 2018.

Meanwhile, the Federal Reserve is carrying on with its “quantitative tightening.” “QT” is the opposite of “quantitative easing.”

Here’s the “too long, didn’t read” version: Where “QE” inflated, QT will deflate.

That’s another $600 billion per of year, making it $1.8 trillion of supply hitting the bond market.

It’s going to send the yield on the 10-year U.S. Treasury sky high. And that benchmark won’t soon return to present levels.

It’ll be at least until this Mother of All Bubbles has collapsed.

There’s no basis to claim the American economy is stronger than ever.

The Donald need only ask the average U.S. worker.

In real terms, hourly wages and salaries are lower than they were in 1959. That’s when the president got shipped to military school for mouthing off too much.

It’s both good and bad news he was never cured of that affliction.

“Mouthing off’ gets the Deep State’s goat.

It also leads to troubling collisions of the Donald and the facts.

“Truth” – let alone “policy” – was never his thing.

He is the Great Disruptor.

You can’t say he’s not doing that.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR